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There is no grand bargain, as the debt ceiling and budget issues are kicked down the road.

The only real development in the budget debate is that a financial transaction tax is adopted in exchange for a one-year increase in Medicare eligibility.

By midyear either Janet Yellen or Alan Blinder replaces Ben Bernanke as Fed Chairman and the administration's entire economic advisory team is turned over.

Question: How many politicians does it take to screw up our economy?

Answer: 537 (436 members of the House, 100 members of the Senate and one president)

The consensus view is that while the upcoming budget debate will likely get ugly and go down to the wire, a 10-year, $2 trillion agreement will be negotiated.

Unfortunately, the last meaningful agreement (in 2013) between the Republican and Democratic parties was the twenty-fourth-hour fiscal cliff compromise on Jan. 1, 2013.

The squabbling and enmity of the recent fiscal cliff debate poisons all future budget talks. The Obama administration is unwilling to make spending concessions anywhere that is needed to make substantive progress on our fiscal deficit. The Republicans are equally entrenched in policy view.

This subcommittee has demonstrated in hearings and comprehensive reports how various schemes have helped shift income to offshore tax havens and avoid U.S. taxes.... The resulting loss of revenue is one significant cause of the budget deficit and adds to the tax burden that ordinary Americans bear.

The debate grows increasingly contentious and vitriolic. Congressional Democrats, prodded by the president, introduce the idea of a wealth tax.

A Levin-led subcommittee investigation determines and highlights that Apple (which deferred taxes on over $35 billion in offshore income between 2009-2011) and many other companies -- including
Hewlett-Packard(HPQ),
Google(GOOG) and
Microsoft(MSFT) -- have adversely impacted the budget deficit by unfairly allocating revenue and intellectual property offshore to lower the taxes they pay in the U.S. (and have even avoided taxes in the U.S. by moving subsidiaries to Nevada). The investigation reveals that Apple was a pioneer (as early as in the mid-1980s) of an accounting technique known as the "double Irish with a Dutch sandwich," which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then on to the Caribbean. The Levin subcommittee finds that this tax avoidance technique employed by Apple has been imitated by hundreds of other international companies.

The Democrats in Congress propose a closing of such corporate tax loopholes and more strict rules regarding non-U.S. tax havens. This creates a complete impasse when Republicans react violently to it. Congressional Republicans, on the other hand, offer sizeable entitlement benefit cuts which turns off the Democrats.

During the debate it becomes clear that the risks of destabilizing outcomes are rising (e.g., a technical default on U.S. debt and a downgrade by all of the major ratings agencies), and investors panic. The S&P 500 hits a low of 1275.

The surprise is that there is no grand bargain in 2013 that brings our country closer to fiscal sustainability -- indeed, there is virtually no bargain (on tax and entitlement reforms nor in discretionary spending cuts) in the new year at all.

The debt ceiling is finally raised, though only minor spending cuts are instituted. At the last moment, the Democrats agree to a one-year increase in Medicare eligibility in exchange for an Elizabeth Warren-inspired campaign (in conjunction with Congressional Democrats) to introduce a financial transaction tax to be imposed on securities trades by year-end. (See surprise No. 4.)

After the debate comes to a close it is apparent that the ability of the administration to enact previously sought gun control laws, immigration reform and other projects is in serious jeopardy.

Foreign leaders openly discuss the waning role of our country's leadership in the world. The U.S. dollar suffers as our standing in the global economy erodes.

Meanwhile, though the fiscal drag from last week's fiscal cliff agreement appears to many to be a manageable $250 billion-$280 billion (or less than -1.0% taken off U.S. GDP), the actual multiplier of this drag is greater than most are projecting (over -1.5%). The growing tortured debate, animosity and fiscal uncertainty that follows between both parties during the January-March period chills the economy further and adversely impacts business and consumer confidence. Corporate fixed investment, hirings and industrial production suffer, and it becomes clear that there is little economic momentum in the U.S. and that, among other issues, corporate pricing power is harmed by increased competition from non-U.S.-based companies.

Most market participants begin to accept the notion that the Fed is essentially out of bullets and can no longer impact our economy at the margin and that it doesn't possess the sort of durable and effective fiscal remedies that are needed to materially address the complexity of the secular challenges facing the country (education, the jobs market, etc.).

By midyear President Obama seeks scapegoats for economic policy failure. He replaces most of his team at the
Council of Economic Advisers as well as Fed Chairman Bernanke (with Alan Blinder or Janet Yellen) a full six months before Bernanke's term is officially over in January 2014.

Despite recent concerns that the Fed will end quantitative easing, more easing lies ahead during 2013, and, in all likelihood, the amount of bond buying will be raised not ended or reduced (as suggested in the recent Fed minutes release).

A weaker-than-expected domestic economy in the first half of the year underscores the fragility of the consumer (in particular).

First-quarter 2013 real GDP is +0.5% to +1.0%, worse than consensus expectations. Second-quarter 2013 real GDP shows little improvement (but only to +1.0% to +1.5%) from the first quarter.

Overall full-year U.S. GDP disappoints relative to the consensus (and particularly relative to the Fed's forecast of +3% growth) and approximates +1.5% (or less) for all of 2013.